Exploiting Harvest Delays: A Healthy Portfolio Needs More Vegetables
by: Matthew Bradbard
November 13, 2009
Most commodity investors with whom I come into contact are trading energies and metals, but perhaps a healthy portfolio needs more vegetables. With the slowest harvest in over two decades, we believe more investors should be looking towards agriculture. Looking at the macro view, in our opinion, adds further bullishness, being soybeans and corn are a staple in one’s diet, and with more mouths to feed we should see demand grow exponentially in the coming years.
In the most recent USDA crop report, they expect the corn harvest to be 12.9 billion bushels, down 1% from the October forecast. They also decreased the yield by 1.3 bushels/acre, which we feel is generous and expect further reductions. While the corn crop is projected to be the second largest on record, up 7% from last year, the demand for corn and its byproducts may be growing at a faster pace.
As for soybeans, the yield was increased marginally to 43.3 bushels/acre with a crop size of 3.3 billion bushels. The usage of soybeans is projected to increase, so if the crop size or yields come into question we expect prices to respond by moving higher.
The problem has been excessive rain that has hindered farmers from getting into the fields to harvest their crops. In the month of October top growing regions around the country received at least twice the normal amount of rainfall. That in combination with unusually cool temperatures slowed crop development. Farmers have only managed to harvest about 40% of their corn crop compared with the 80% plus we have been averaging for the last 5 years. In soybeans, circumstances are not much better, being farmers have only harvested 80% and should be completely harvested at this point. Complicating things further, farmers will need to spend more money to dry their crops. If harvest delays continue for corn and soybeans, it is feasible that farmers that double-crop will be unable to plant wheat this fall.
Though we focus on corn and soybeans in this article, weather problems in Indonesia and the Philippines are wreaking havoc in the rice market. The Mississippi delta, which is a massive cotton growing area too, has encountered excess rainfall that is affecting the cotton market. In the same USDA report, cotton production was forecasted to reduce 3.8%, or 12.5 million bales.
The sad reality is that when Mother Nature misbehaves, money can be made and lost. Floods, droughts, hurricanes and other natural disasters disrupt the norm and create trading opportunities.
Buying corn in late October/early November and holding until mid-May is one of the best seasonal trades out there. This trade has worked 34 out of the last 40 years, for a success rate of 85%. This trade has had a 10-year win streak that began in 1998. Past performance is not indicative of future results. With more competition for corn inventories from animal feed, energy needs and foreign business, coupled with the growing cycle and harvest delays, we think being long corn makes sense. Corn prices have started to move higher with March 10’ corn advancing 25% off a 3 ½ year low made just over 2 months ago. We suggest gaining long exposure in March or May contracts via call options or long futures with option protection. We see the $3.75/3.80 level acting as support and expect prices to trade near $4.80 in Q1 next year.
The United States is the leading producer of soybeans, though a larger than anticipated crop from China or Brazil will have an impact as both countries are becoming increasingly bigger players. Unlike corn, soybeans cannot be stored for an extended period, which makes prices at times more volatile. For the last month soybeans have traded sideways in about a 60 cent trading range. As long as prices stay above $9.50 on the March contract we like being long. We are not currently exposed to soybeans with clients but will be looking for long opportunities on a setback. We suggest buying $1 call spreads or to trade long futures with options protection. Trading soybeans is a bit more expensive than corn and also expect more volatility, so perhaps trade a lighter position size. With an increase in harvest delays, a reduction in crop size, and as long as South .America and or China do not have an immense crop, we would expect soybeans to find their way back to $11 early next year.
Most commodity investors with whom I come into contact are trading energies and metals, but perhaps a healthy portfolio needs more vegetables. With the slowest harvest in over two decades, we believe more investors should be looking towards agriculture. Looking at the macro view, in our opinion, adds further bullishness, being soybeans and corn are a staple in one’s diet, and with more mouths to feed we should see demand grow exponentially in the coming years.<<<
True, and with this type of investment, we will see the prices go even higher.
As the prices rise and people will not or cannot buy all that they did in the past, and more get laid off and soon we will be back living in the 1800’s and dreaming of the improvements we once could afford.